In the midst of the day-to-day flurry of wagging tails and purring patients, it’s easy to lose sight of strategies that can help keep a veterinary hospital healthy and running smoothly. Developing a plan to effectively manage labor costs is one strategy that can help do just that.

The cost of labor is one of the toughest expenses to manage but a significant area of opportunity for increasing profits. When comparing the top 20 percent of most-profitable hospitals against global averages, the most-profitable hospitals spend 6 percent less in labor. Six percent might not seem like much, but it is 6 percent of gross revenue. And that 6 percent directly impacts your hospital’s bottom line.

Based upon the global average, total labor, including taxes and benefits, for both DVMs and non-DVMs should be 40 percent of gross revenue. If your hospital’s total labor costs are above this amount, you have opportunities to streamline. When DVM compensation is tied to an annual contract, you will need to focus on non-DVM compensation to affect changes in labor in the short term. This means that the real art to compensation is how to pay and utilize non-DVM staff.

So where should you start? Though it might sound daunting, simply being intentional about how you view and manage labor is the first step. It doesn’t have to be complex, but being thoughtful and planning ahead can have a significant impact on profitability.

Here are five ways you can more effectively manage labor:

1. Have the Right People Doing the Right Jobs. One of the keys to effective management of labor is making sure you use your human resources wisely, and that means making sure the right team members are doing the right jobs. For example, a team member making $25 an hour should not be cleaning the kennels.

Having detailed job descriptions for each employee — DVMs, nurses, groomers, kennel workers, and front-desk employees — is important. Part of their training should involve setting clear expectations about tasks to be performed. Additionally, assigning levels for each of the different job types and then setting pay ranges according to those levels is a good practice.

By ensuring that you effectively utilize non-DVM staff members to fully support the DVMs, you enable your doctors to produce more, which in turn benefits the hospital as a whole.

2. Schedule Labor and Review It Weekly. In veterinary medicine, labor is often scheduled based on the hours the employees need to work. However, this approach often leads to inefficiency. For example, from noon to 2 p.m., doctors are often catching up from surgery and doing callbacks, but during that time the non-DVM staff is likely not kept busy.

Instead, labor should be scheduled based on the needs of the doctor and hospital — how many patients are being seen. Since the goal is to keep labor costs below 40 percent of gross revenue, assessing how your hospital is tracking toward this goal on a weekly basis is easy. For every dollar that comes in the door, about 35 to 40 cents should be spent on labor and benefits. Every week when the books are closed out, you can review the total revenue and compare how much was spent on labor. If the ratio is too high, you can make changes for the upcoming week. Profit-and-loss statements are usually only reviewed four times each year. Going three months without looking at this issue could be very costly.

3. Keep Your Existing Talent. The cost to hire and train new talent is staggering. Instead, hospital owners and practice managers should focus on retaining current employees. There are many different ways of doing this.

For example, consider an alternative schedule. One of the biggest labor challenges is the availability and hours that people are able to work. Hospitals that are open evenings and weekends have a lot of financial success, but many employees might be unable or unwilling to work those shifts. Non-DVM staff members who work on the weekends could be given Monday and Tuesday off, or they could be offered a reduced or part-time schedule during the week, allowing them to spend more time with their family.

Some hospitals offer perks such as a concierge service, which provides a set amount of money for employees to spend. A doctor could have the concierge do their grocery shopping or use them to hire house cleaners. You could consider offering a bonus program or implementing a wellness allowance for all employees.

Creating a positive culture goes a long way toward retaining existing talent. In a recent survey of 13,000 millennials — the incoming workforce — culture and values ranked as the most important considerations when evaluating an employer. By developing a pleasant, team-oriented culture that focuses less on hierarchy and more on creativity, flexibility, and balance, you will not only improve employee morale but retain staff as well.

4. Budget for Raises. When it comes to giving pay raises, many veterinary hospitals simply go with a gut feeling or determine wages based on historical numbers without any rhyme or reason.

Raises can be included in a hospital’s budget. To do so, owners and practice managers should first project their revenue for a given period. The next step is to determine the existing cost of labor and add the percentage of the raise. This method helps ensure that your labor costs are kept in proportion to your revenue.

For example, if a hospital projects $1 million in revenue for the coming year and knows that total labor is 33 percent, excluding taxes and benefits, the total cost of labor would be $330,000. If the total raise percentage was 5.8 percent, then the total cost of labor with raise would be $349,140, leaving a raise pool of $19,140 to be allocated to the employees.

5. Increase Your Revenue. If you are overstaffed but are reluctant to cut back hours or let anyone go, one option is to grow your way out of the excess labor burden by increasing revenue.

By ensuring your hospital is capturing its revenue, you are in essence gaining more money with which to pay employees. Between 5 and 10 percent of all veterinary services rendered are not charged. If a hospital was intentional about charging for those services performed, the hospital’s overall revenue would increase by 5 to 10 percent.

Similarly, over 40 percent of pets have at least one past-due exam reminder. This may seem like a small issue, but it can have a significant effect on revenue. Imagine you have 2,300 active patients and that half of these patients are overdue for their annual exam, waiting 14 months instead of the recommended 12. If an average patient visit costs $156, the DVM’s missed revenue would be $179,400 every six years. For a hospital with three full-time DVMs and the same patient profile, this equates to an average of $89,700 in missed revenue per year.

So how do you make sure to capture the missed revenue from client non-compliance? One way is through forward-scheduling. Before clients leave the office, make sure they schedule the next appointment. Implementing forward-scheduling will promote better overall patient care and lower the expense that comes from following up with past-due patients. Additionally, forward-scheduling will decrease the amount of phone traffic at the front desk, allowing staff to engage with clients and improve the overall client experience.

Implementing just one of these five tips at your hospital is the first step to managing labor more effectively and ultimately helping improve your hospital’s profitability.

About the AuthorTerry O’Neil is the partner-in-charge of KSM's Veterinary Services Group. With 30-plus years of experience, Terry provides veterinary practices with the business, financial, and tax advice to assist with their growth and management. Connect with him on LinkedIn.